Specific taxes for specific spending commitments?

With Brexit and Russia dominating foreign policy, the single most important domestic policy area that the Government has to consider is what to do about public spending. After last year’s General Election went so wrong for the Conservatives, the rush to blame ‘austerity’ was immediate, with even the Chancellor, Philip Hammond, admitting that the public were getting weary.

This perhaps explains why the Government seem so keen to loosen the purse strings. This March, in a low-key Spring statement, Philip Hammond said that if the economy continued to outperform expectation, then there would be even more money available for public services.

The NHS in particular is seen as the public service requiring substantially more cash. The recent winter has persuaded many that the NHS is operating close to capacity, and the Conservatives recognise that this is the battleground, more than any other, that Labour wants to campaign on. A spending commitment will be key to guarding against opposition attacks.

As reported in the press last week, the Government is warming considerably to the idea of a 1p hike in National Insurance to fund extra health spending. This would raise approximately £4.9 billion, all of which would go to the Health Service, and would serve as a reminder (a) of the Government’s commitment to the NHS, and (b) to voters, that you can’t spend substantially more on public services without raising more in tax. In 2002, the Labour Government did exactly the same thing, a move that proved to be vindicated at the next General Election.

There is one problem however, that according to the Institute of Fiscal Studies, the tax burden is already on course to rise to its highest level in 40 years. Extra taxes could well have a negative impact on growth, and the prospect of future governments reversing the hike would be extremely unlikely. National Insurance was initially meant to pay for a handful of contributory benefits such as retirement pensions, rather than being another form of general taxation, and any future hike could all too easily turn into a permanent future increase in the tax burden.

There is a sound case for more money for public services, but it must not come at the cost of the fiscal restraint this country requires to retain its status as a dynamic, lower-tax economy.

 

Blog written by: Elliot Arwas

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